What Is the Principle of “Put-Call Parity” and How Does It Relate to a Synthetic Future?
Put-call parity is a fundamental concept in options pricing that states that a portfolio of a long European call and a short European put at the same strike and expiration must equal a forward contract (or future) on the same asset, plus the present value of the strike price. This relationship is enforced by arbitrage.
A synthetic future is a direct application of put-call parity, demonstrating that a specific combination of options can perfectly replicate the payoff of a futures contract.
Glossar
Synthetic Future
Derivation ⎊ Synthetic Futures, within cryptocurrency markets, represent synthetically created assets mirroring the price exposure of underlying assets ⎊ typically cryptocurrencies ⎊ without requiring direct ownership of those assets.
Put-Call Parity
Relationship ⎊ Put-call parity describes a fundamental relationship between the price of a European call option, a European put option, and the underlying asset price, assuming they share the same strike price and expiration date.
Parity Equation
Equation ⎊ The Parity Equation, within the context of cryptocurrency derivatives and options trading, establishes a theoretical relationship between the price of a cryptocurrency and the price of its associated futures contract or options.
Parity
Equivalence ⎊ ⎊ Parity, within financial markets, fundamentally represents a state of equality between two or more assets, rates, or pricing models, often serving as a benchmark for arbitrage opportunities or risk-neutral valuation.